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Euro Stymied by 1.2900 Level

However,
further progress in the EUR/USD is unlikely to
come from additional European data, but rather from the upcoming US
economic releases. The key question going forward vis a vis the direction of EUR/USD trade will not
be;is the EZ economy strengthening
but rather is the US economy weakening? Therefore this
Friday’s US Non- Farm payrolls report looms even larger than usual and may be
the trigger that catapults the pair above the 1.3000 level if the data prints
materially worse than expected.

Yesterday
we noted that typically US Treasury Secretaries from the financial sector are
viewed as dollar bullish by the FX market. But HankPaulson, former chairman of Goldman
Sachs and President. Bush’s nominee for the post, may be an exception to the
rule. Mr.Paulson has extensive experience with Chinese business and
political leaders and is therefore eminently more capable in nudging the Chinese
towards a more flexible exchange rate regime for the yuan than former Treasury Secretary Snow. In fact,
overnight PBOC already stated that it would take innovative steps to bring its
Balance of Payments surplus into equilibrium and would press ahead with making
the yuan convertible – a move that ironically enough would likely be negative
for the dollar as investors and speculators would be free to bid up to the yuan
relative to the greenback. The indirect beneficiary of such scenario would of
course be the Japanese yen which often acts as a yuan proxy in the FX
markets.

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